Friday, March 24, 2023

My Shortest Post Ever

 Today I'm gonna go for a record: Hellasious's shortest post ever.

Here goes:


Hint: It's about global banks

Prize for the first to decipher the "Delphic" initials... free upgrade to Subscriber Status (which doesn't exist, but hey, you never know) ;)

Sunday, March 19, 2023

The Oracle Of Wall Street And The Oracle Of Delphi

 Warren Buffet’s Berkshire Hathaway has 39% of its holdings in Apple shares and another 11% in Bank of America. Thus, a massive 50% is in just two stocks. In my opinion, not exactly a prudent “widows and orphans” investment stand - but who am I to question the Oracle’s judgement?

Instead, I will act like the ancient Oracle of Delphi who was famous for prophesies that could be interpreted any which way: here are charts of Apple and Bank of America. Readers are encouraged to read them as they themselves see fit.

Friday, March 17, 2023

Quantitative Tightening Ends Abruptly, Inflation To Follow

 Well...There goes QT.... In just a couple of days the Fed has pumped back in as much money as it drained in the last 4-5 months. 

Do you think inflation will follow? Unless we go into a full, blown out Crash yes, inflation is going back up ... 

Federal Reserve Balance Sheet Assets Jump Sharply

PS The Fed may flood the system with liquidity if it needs to, but the real problem here is counterparty risk exposure between financial institutions. As many of you may know, the entire global financial system (and thus the global economy) depends on the smooth functioning of the interbank market for foreign exchange, money (ie deposits) and their derivatives. It is, by far, the largest market in the world and depends on “lines” granted by banks to each other, ie how much do they trust each other to fulfill their obligations arising from trading.  Will they deliver on settlement date, will they return the money when due, etc.

When banks’ interbank credit departments get spooked they immediately slash their lines - and when that happens it’s basically all over for the bank whose lines are being cut - it can then only go to the Fed as lender of last resort.

Problem is, when one domino falls it is followed by others. As one bank gets its lines slashed it must do the same with lines it has itself extended to smaller banks, and so on and so forth.  The bigger the bank that gets in trouble the worse the result down the line. For example, Credit Suisse is amongst the 30 largest globally systemic banks in the world.  You can safely bet that it’s counterparties are taking a very serious look at their exposure to it. In fact, I’m pretty darn certain that bank officers are re-examining ALL of their credit lines to all banks right now.

Trying To Stop A Falling Knife - Memories of Crashes Past

Yesterday a team of banks announced that they will deposit $30 billion with Republic First Bank in an attempt to bolster confidence in what is quickly becoming a banking crisis.  Likewise, the Swiss National Bank threw Credit Suisse a lifeline.

My immediate reaction was to remember a parallel from 1929.  

On Thursday October 24, 1929 i.e. a few days before the infamous Crash of Black Monday, the stockmarket was getting pummeled.  A few top bankers decided to stem the bloodbath by getting themselves physically on the floor of the NYSE and making a show of buying stocks: Charles Mitchell from First National City Bank, JP Morgan Jr., Thomas Lamont and Albert Wiggin from Morgan. Indeed, their show of confidence managed to stop the drop, stabilized prices and even created a rebound. But, it was all extremely short lived, as we know.

Why? Because then as now, fundamentals ALWAYS rule the day, eventually.

A Few Days Before The Crash

And Right After

Monday, March 13, 2023

Three Banks Fail, Fed/Treasury Step In - And Save The Day?

The REAL news in the Fed/Treasury moves to shore up deposits in the banks that failed last week is not the Fed/Treasury moves.  The REAL news is that no other bank stepped in to take them over. Think about it... 

Also news is that the cost of saving them will be spread out amongst all other FDIC insured banks for all amounts over $250.000.  That's not going to be chump change, as total deposits for Silicon Valley and Signature come to approx.  $300 billion and FDIC's Insurance Fund balance in the end of 2022 came to $128 billion. Sure, the failed banks' assets will be liquidated to pay out depositors but given the state of the tech and crypto industries... don't expect anything near 100 cents on the dollar for the loans.

Update: First Republic Bank stick is plunging 60% today. With $210 billion in assets, it #14 in size in the US. The dominos refuse to stop falling despite Mr. Biden’s pledge to do whatever is needed.

Saturday, March 11, 2023

Two ... Ooops... THREE Banks Fail


Two...errr...THREE ...US banks failed this week: Silvegate and Signature specialized in crypto financing and transactions, Silicon Valley in tech startups. Are the two ... THREE.. events connected?

Yes: they were emblematic institutions in the two market sectors that experienced the most rabid bubble speculation.  Their failure comes on the heels of their respective bursts.  

The question now is this: are there more dominos to fall? Yes, there are. Our financial system is highly interdependent and leveraged, so it is only a matter of time until losses surface elsewhere.

Normally, when things get precarious the Fed immediately steps in and provides liquidity to the banking system. Can it do so today? With inflation where it is?  No, objectively it can’t - but, it will if things get nasty. The Fed simply isn’t wired to be a truly tough taskmaster.

UPDATE: The Treasury and Fed stepped in to protect all Silicon Valley deposits, even those above $250.000 which are covered by FDIC.  Turns out 90% of all deposits were over $250.000.  And so it begins...

Friday, March 10, 2023

We're Not In Kansas Anymore - It's A Brave New World (?)

Today I'm using two well known "blurbs", one from The Wizard of Oz and the other a famous book title. I will connect the two below.

We're certainly not in Kansas anymore.  The financial world has come topsy turvy on the heels of massive monetary injections which, predictably, caused rampant speculation and massive inflation.  The days of near zero inflation and negative interest rates are gone, and the sooner we realize and assimilate this into our models, the better.  

Furthermore, because of crushing debt loads we need to have a serious political debate about the future of fiscal policy in the US, EU and Japan.  We will have to make really tough decisions, and the choices are few and very unpleasant. The reason is simple, as in this blog's name: Sudden Debt.  The West has encumbered itself with enormous debt amassed over several decades in order to achieve a standard of living that could not be otherwise sustained.  

To put it simply, we borrowed our prosperity.  With zero interest rates this could arguably be ok - to a degree -  but with rates now spiking debt is becoming an ever heavier millstone around our necks.  How long before our necks break and Sudden Debt causes Sudden Death? Judging from Mr. Powell's recent conversion to inflation fighting, it won't be too long - because he also has to take into account the rabidly anti-tax Republicans and the significant possibility of failure in debt limit negotiations. 

In other words, the Fed HAS to bring down inflation and interest rates as soon as possible, before they bring down the whole show, Pax Americana included.

Is it a Brave New World? Maybe. Maybe Mr. Powell will not flinch and could even double down on his inflation fighting. Perhaps he will even go as far as increase the amounts of QT, something he should have down a long time ago.  But, I'm not holding my breath, because he really does not want to be blamed for bringing down Wall Street, something that must be done if financial conditions are to tighten enough to kill inflation for real.

So, yes, we're not in Kansas anymore - but we're not yet in a brave new world.

Wednesday, March 1, 2023

China's Manufacturing Comeback And Global Inflation

 Until recently China's economy had been toiling under strict zero-COVID rules - but no more.  Manufacturing PMI jumped in February signaling a return to the factory floor, and - naturally - demand for raw material, energy and transport services (see chart below).

China PMI

Which raises this question: if global inflation soared without Chinese demand, where will it go now?  IMHO, it certainly won't go down any time son...

Wednesday, February 22, 2023

The Fed Was 17 Months Late In Raising Rates

 The Fed printed a gusher of money during 2020-21, and then hid its head in the sand ignoring inflationary pressures, labeling them “transitory”.  Finally, they woke up from their dream state and started raising rates all in a rush.  How much time did they lose, how far behind the curve were they?  The short answer is they were at least 17 months late - way too late in my opinion. 

Here's a chart.

  The blue line is the yield on the 2 year Treasury, which is anchored by the Fed funds rate.  The red line is the yield of the 10 year Treasury which is entirely dependent on the market.  Notice how the red line starts to creep higher starting in August 2021, even as the 2 year remains flat.  Meaning, the market was already pricing in higher inflation, way before the Fed started raising rates in October 2022; that's a whole 17 months where the market was telling the Fed to get its head out of the sand - to no avail. 

By the time the Fed acted, the 10-2 spread was already at 100 basis points (the black arrows).  The Fed has been playing catch up ever since, causing the spread to - finally - go negative.  Yet, rates are still lower than headline inflation and the ocean of liquidity created by the Fed is still almost entirely untrained.  The “easy” part of inflation moderation is now finished as fuel prices have stopped dropping, and it is highly likely that inflation will, if anything, start rising again as higher wages kick in.  And that’s when the Fed will, at last, truly wake up.

Monday, February 20, 2023

If The Fed And ECB Were "Regular" Banks They Would Be Bust

 The Fed and ECB are now running huge operating losses PLUS enormous mark to market losses. To wit:

  1. There is a wide gap/mismatch between paying high short term rates (eg on the Fed's reverse repo) and low returns on their bond portfolios.  This is a classic borrow short - lend long problem, exactly the same as the Savings and Loan Crisis of the late 1980s.
  2. Central banks are holding long term bonds on their balance sheets that are now priced much lower than what they bought them for.  The unrealized mark to market losses are in the trillions of dollars/euros.
This article explains things pretty clearly.  I wonder how much longer the monetary world will continue to operate as if the Emperor's clothes are real...